Stock Option Grants to Target CEOs during Private Merger Negotiations

Posted: 22 Apr 2009 Last revised: 30 Dec 2010

See all articles by Eliezer M. Fich

Eliezer M. Fich

Drexel University - Department of Finance

Jie Cai

Drexel University

Anh L. Tran

Cass Business School, City University London

Date Written: November 10, 2010

Abstract

Unscheduled stock options to target CEOs are a non-trivial phenomenon during private merger negotiations. In 920 acquisition bids during 1999-2007, over 13% of targets grant them. These options substitute for golden parachutes and compensate target CEOs for benefits they forfeit because of the merger. Targets granting unscheduled options are more likely to be acquired but they earn lower premiums. Consequently, deal value drops by $62 for every dollar target CEOs receive from unscheduled options. Conversely, acquirers of targets offering these awards experience higher returns. Therefore, deals involving unscheduled grants exhibit a transfer of wealth from target shareholders to bidder shareholders.

Keywords: Merger negotiations, Stock options, Takeover premium

JEL Classification: G30, G34, J33, K22

Suggested Citation

Fich, Eliezer M. and Cai, Jie and Tran, Anh L., Stock Option Grants to Target CEOs during Private Merger Negotiations (November 10, 2010). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=1392322

Eliezer M. Fich (Contact Author)

Drexel University - Department of Finance ( email )

LeBow College of Business
3220 Market Street – 11th Floor
Philadelphia, PA 19104
(215) 895-2304 (Phone)

Jie Cai

Drexel University ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
215-895-1755 (Phone)
215-895-2955 (Fax)

HOME PAGE: http://faculty.lebow.drexel.edu/CaiJ/

Anh L. Tran

Cass Business School, City University London ( email )

106 Bunhill Row
London, EC1Y 8TZ
United Kingdom
+44-207-040-5109 (Phone)
+44-207-040-8881 (Fax)

HOME PAGE: http://https://www.cass.city.ac.uk/faculties-and-research/experts/anh-tran

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